My most recent books are the Leader's Guide to Radical Management (2010), The Leader's Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.

Steve Jobs: Management Innovator

Deloitte’s Shift Index shows that the private sector—once the pride of America and the engine of economic growth—is getting only one quarter of the return on assets or on capital than it got in 1965. Why? The reason is not that the managers have forgotten how to manage. The primary reason is that world has changed and management hasn’t.

Half a century ago, big firms were in charge of the marketplace. They could dictate terms to customers. Customers had few choices and imperfect information. Large hierarchical bureaucracies pursuing economies of scale and pushing products and services at customers were fairly effective in dealing with such a world.

Then the world changed. At first slowly and then, in the last decade, rapidly. Customers now have many choices and instant access to reliable information about those choices and can share views with other customers. As a result, there has been an epochal shift in power from seller to buyer. Now large hierarchical bureaucracies are no longer nimble enough to cope with a world in which the customer is effectively in charge. If customers are not delighted, they can and do go elsewhere. In order to delight the customer, a firm needs continuous innovation.

The second is a fundamental shift from semi-skilled to knowledge work. Meeting the business imperative of delighting customers can only be accomplished if the knowledge workers contribute their full talents and energy to contribute continuous innovation. An army of obedient infantry is not much good at this. Instead one needs energized knowledge workers drawing on all their imagination and talents.

A different way of running organizations

To deal with this very different world, a wholly different and more agile way of running organizations that draws on the talents of those doing the work needed to emerge. And it has.

Given the dramatic changes in the world, we would expect organizations that meet customers’ needs and draw on the talents of those doing the work will flourish. That’s exactly what has happened. Hundreds of organizations all around the world are being run in a radically different way—a way that is more responsive to customers’ needs, that is more fun for people doing the work and which makes scads more money than running a company in the traditional way.

The idea of running organizations in this radically different way has been around for some time. Like all fundamentally different ideas, it has had a difficult birth. The inertia of the status quo and ingrained habits and attitudes of existing practices treat revolutionary ideas as a threat and eject them. It is only as the old order becomes increasingly unproductive that desperation eventually sets in and the new ideas have a chance to show what they can produce.

The best-known large-scale example is Apple [AAPL]. Obviously much has been written about the late Steve Jobs. Much time has been spent trying to decipher the reasons for his success over the last decade or so in transforming Apple from an almost bankrupt computer firm into the one of the valuable companies on the planet. Apple has transformed how we listen to music, what we do with our phones and how we connect on the Web.

How did this happen? Many see Steve Jobs as a talented designer. And he was. Many see him as a great salesman. And he was. Many see him as a great negotiator. And he was. But there are many talented designers, salesmen and negotiators in the world who have not made anything like the same impact. As James Allworth argues in his HBR blog, Steve Jobs Solved the Innovator’s Dilemma, the most profound contribution that Steve Jobs made was in demonstrating a radically new way of a running a company.

When Steve Jobs pursued his vision as a young man at Apple in the 1970s and early 1980s, the company was being run by professional managers. Jobs found himself at odds with their thinking. Not surprisingly, he was ejected. In the hands of those professional managers like John Sculley who was brought in to provide “adult supervision”, Apple experienced several decades of decline. Jobs described the fundamental cause of Apple’s problems as one of letting profitability outweigh passion: “My passion has been to build an enduring company where people were motivated to make great products. The products, not the profits, were the motivation. Sculley flipped these priorities to where the goal was to make money. It’s a subtle difference, but it ends up meaning everything.”

When Steve Jobs returned to Apple, he was able to implement his revolutionary management philosophy and the results were extraordinary. There were thousands of layoffs. Scores of products were killed on the spot. He knew the company had to make money to stay alive, but he shifted Apple’s focus of Apple away from profits. Profit was viewed as necessary, but not sufficient, to justify everything Apple did. That attitude resulted in a company that is entirely different from any 20th Century company. Apple had undergone a phase change.

Apple is not a perfect model of radical management. In some ways, the company was run in a dictatorial fashion, which infringes the principle that communications should be horizontal and collaborative. But on the most important principle, the shift from a focus on making money to a focus on delighting customers, Apple showed the way.

Will Apple continue to prosper? It will depend on whether the new management adheres to the principles of radical management.

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The forces documented in Deloitte’s study have nothing to do with management practice, but are exogenous. (There are additional factors, including energy costs, that are not mentioned in in Deloitte, but also tend to have a negative impact on ROA).

One can argue that good management practice should respond effectively to exogenous shifts. I don’t disagree with that point in general, but if you want to build a case for a specific set of practices you need to show that what you’re peddling actually does differentiate the winners and losers.

By the way, a theory isn’t proven by the absence of alternate theories. The burden of proof rests on the guy who’s pushing the snake oil.

During the period in question, management faced many challenges. It is unlikely that fluctuating energy costs had much to do with the declining ROA or ROIC. Huge shifts in energy prices had no obvious impact on ROA or ROIC: http://upload.wikimedia.org/wikipedia/commons/8/87/Oil_Prices_1861_2007.svg.

When you tie the declining ROA and ROIC with other elements, such as declining life expectancy of firms, lack of engagement of employees, and the loss of whole sectors of the economy due to foreign outsourcing, there is a prima facie case that something is amiss, particularly when other firms following different practices are getting strikingly more positive results. Some firms will undoubtedly prefer to go on doing what they have been doing until they are put out of business. When the options are change or die, some will choose to die.

Even medieval doctors practicing blood-letting eventually noticed that their patients tended to die as a result of their activities and changed their practice. Those traditional managers who are still open to learning should follow their example.

Thanks for proving my point. The graph you cite as support for the argument that energy costs are not a likely cause of declining ROA shows a massive increase in energy costs from 1966 to the present.

Everyone agrees that something is amiss; the “money” question, though is defining what is driving the decline. The Deloitte study does a poor job identifying what factors distinguish winners from losers, and “The Power of Pull” does no better.

You may or may not agree with Jim Collins in “Good to Great”, for example, but to his credit, his research systematically identifies management practices that work — which is why his book ranks #95 on Amazon ten years after publication, while yours is around #25,000.

A historical note — it’s doubtful that medieval physicians noticed that patients died from the practice of blood-letting, since the procedure was performed by surgeons. In any case, blood-letting was widely practiced into the nineteenth century, and recommended as late as 1928 by William Osler.

Great perspective, Steve. I want to add my voice to the point by reposting a blog on this subject I originally posted a few months back: http://mckeeverandsullivan.wordpress.com/2011/05/20/the-leader-or-the-system/

This is the official jump the shark article of the post Steve Jobs death orgy of articles. And it was John Sculley, who was brought in to run Apple. Vince Scully is a sportscaster. And a good one at that.